What are Artificial Costs?

Definition: Artificial cost is kind of a strange term. You would assume that all costs are real—not artificial. Well, that is true in the literal sense. Artificial costs usually refer to costs between interconnected departments. In other words, costs that are created by one department using another department’s services are considered artificial costs because these costs are generated within the organization. The costs aren’t paid to separate company. Instead, the costs are paid to a different department in the same company.

Example

It might be easier to take a look at an example. I think one of the great examples of artificial costs is IT departments. The IT department maintains and manages all the computers that a company uses including the maintenance staff computers. The maintenance staff, in turn, maintains the facilities and computer transportation equipment for the IT department. The intercompany costs between departments are called artificial costs because the company is creating its own costs out of thin air.

The IT department needs the maintenance staff’s services to make sure the facilities are clean and workable. The maintenance staff needs the IT department’s services to make sure their computers work properly in order to do their jobs. Both departments are dependent on each other for services.

What Does Artificial Costs Mean?

Artificial costs create additional costs for a company that don’t relate to producing or selling a product. In this way, artificial costs are burdensome to companies. On the other hand, artificial costs are a good thing. If the company couldn’t perform these tasks in house, it would have to hire outside firms to for IT and maintenance. Outside firms would probably costs more than performing these jobs internally.